Question

GL0701 (Algo) - Based on Problem 7-5A LO C2, C3, P4

The following selected transactions are from Lee Company.

Year 1

December 16 Accepted a $21,600, 60-day, 8% note in granting June Taylor a time extension on his past-due account receivable.

December 31 Made an adjusting entry to record the accrued interest on the Taylor note.

Year 2

February 14 Received Taylor’s payment of principal and interest on the note dated December 16.

March 2 Accepted a $7,000, 8%, 90-day note in granting a time extension on the past-due account receivable from Brown Company

March 17 Accepted a $15,000, 30-day, 8% note in granting Maria Gonzalez a time extension on her past-due account receivable.

April 16 Gonzalez dishonored her note.

31 Brown Company dishonored its note.

August 7 Accepted a $20,000, 90-day, 8% note in granting a time extension on the past-due account receivable of Garcia Company

September 3 Accepted a $11,400, 60-day, 10% note in granting Carlos Sanchez a time extension on his past-due account receivable.

November 2 Received payment of principal plus interest from Sanchez for the September 3 note.

November 5 Received payment of principal plus interest from Garcia for the August 7 note.

December 1 Wrote off the Gonzalez account against the Allowance for Doubtful Accounts

Answer 1

The student's question involves business accounting practices, specifically the handling of notes receivable and the associated interest calculations and treatments of dishonored notes in the context of Lee Company's financial transactions.

Step-by-step explanation:

The question relates to business accounting transactions involving notes receivable and interest calculation. Lee Company has engaged in various transactions granting time extensions on accounts receivable by accepting notes bearing different interest rates and terms. The calculation of accrued interest on these notes, the recording of payments received, and the treatment of dishonored notes are key accounting activities in this scenario.

For instance, the note accepted on December 16 from June Taylor would involve calculating accrued interest as of December 31. This can be done using the formula Interest = Principal × Rate × Time. For the $21,600, 60-day, 8% note, interest for 15 days (December 16 to December 31) needs to be accrued on December 31. Similar calculations would be required for other notes stated in different transactions throughout the year.

In cases where notes are dishonored, such as the ones from Gonzalez and Brown Company, Lee Company would have to write off these accounts or pursue payment through other means. Writing off against the Allowance for Doubtful Accounts is done to reflect the unlikelihood of collecting the debt.

The scenarios mentioned also involve understanding the future value of money, as the interest bearing notes represent money to be received in the future with added interest. Lee Company has to account for these inflows and determine their present value, if necessary, to accurately reflect the company's financial standing.